The Fourth Turning...Into the Greater Depression?

Take a minute to think about your view of human history, and our continued progression as a species.

Do you believe human history is linear...always getting better...onward and upwards to a better existence?

Is it chaotic...stuff happens, people react, then more stuff happens...but there's no pattern to it?

Or...is human history cyclical...with those who neglect history destined to repeat it?

Most of the Western world subscribes to the linear school of thought. Things are always moving in a general direction - sometimes good, sometimes bad, but always moving. And I'd assume that most people believe the general trend of progress is up.

Your individual opinion may depend on your generation. Old timers are often pining for the "good old days" when morals and values "meant" something in America, you could go to the movies for a nickel, etc.

On the other hand, today's youth wants nothing to do with their parents or grandparents generational values and culture. I'm 27 years old...and the though of growing up in a 1950s Leave It To Beaver household isn't too alluring for me.

For the longest time, I held a predominantly linear view of history's progression. This very well may be biased by my own personal experiences. I run a software startup by day, and blog and trade online as a hobby...none of which would have been possible 10+ years ago. What the heck would I have done then?

On our Honeymoon a couple of years ago, my wife and I were staying in a remote hotel in Costa Rica. Very limited TV, no internet...for 3 whole days. By the time we got to a modern hotel, I was soaking up as much CNBC Europe as I possibly could...my wife asked why we had to spend our evenings with Larry Kudlow...but hey, I'm just not going to sit outside under a coconut tree and chill out. Not my thing. I like being plugged in.

So in my eyes, there's no doubt about the progression of the world...I wouldn't want to live at any other time...there are more plugs today than ever before, after all...and I'm always excited what the next 5-10 years will bring.

But are there setbacks in human progress? I mean, the world did basically nothing from 500 - 1500...except hang out in castles, work the land, pray, and tithe. That's 1000 freaking years!

How can that happen? How can the world stop moving forward for that long?

And there are more recent examples of setbacks and stalls. The Great Depression wasn't really that long ago. From 1929-1945, the US was in a major depression, then a world war. Not fun.

Can history repeat...or as Mark Twain said, rhyme? Are we "beyond" these setbacks...or are we arrogant to think so?

The Fourth Turning, by Neil Howe and William Strauss, is a fantastic book that explores US history, drawing definite cyclical patterns that date all the way back to the War of the Roses. Here's the crux of it.

A human life lasts roughly 80 years. Even though humans are living longer on average today, a full life has always been about 80 years...averages were skewed downwards in earlier times, because there were more premature deaths, but a "full life" has always been about 80 years.

At any given time, you've got about 4 generations of people inhabiting the US, separated by about 20 years each. These generations are shaped by their shared experiences...so their beliefs, their actions, etc, are really a function of the country they grow up and live in.

Now here's where it gets interesting - roughly every 20 years...going back to The War of the Roses in England, and carrying through to the Glorious Revolution in the New World...all the way to the present day...a new era dawns in America.

These eras fit into one of four categories which always repeat in the same successive order. Sounds wild...I couldn't picture it until reading the book...but here are the four eras that Howe and Strauss define:

Crisis - Oftened defined by a major war, calamity, depression, etc. Think Revolutionary War, Civil War, and Great Depression/WWII.

High - What follows the Crisis. Hey, we got through it, now things are looking up, up, and up. I think this is what Jim Rogers says he sees in Sri Lanka - the war is almost over, Crisis phase nearing an end, what a great time to invest. In the US, the post WWII baby boom, suburban migration, and Leave it to Beaver would make up the High. We can go to the moon, we can do anything we put our minds to!

Awakening - A younger generation comes of age, and resents all the rules set by The Man during the High period. Since Highs follow Crises, they are characterized by rules and structure. Think 60's America as the resistance to this - Woodstock, Tie Dye, and Free Love.

Unraveling - The Awakening uprising is integrated into mainstream culture, and society starts to split apart at the seams...hence the name. The individual rules the day. It's "me first." Old timers lament the lack of virtue and civic spirit. Prime time for Wall Street and Las Vegas.

According to The Fourth Turning, each generation is shaped by the era it was born in. I grew up during an Unraveling...so according to How and Strauss, that has shaped my beliefs. The only world I know is one of relative peace and prosperity. Depressions and major wars are things I've only read about.

So the theory goes that the farther you get away from a Crisis, the more likely you are to repeat it...because the younger generations don't actually believe it can happen again. They think the ills of the past have been fixed...and often very limited knowledge of the last Crisis in the first place...so in fact, they have the perfect personality for causing the next crisis!

Remind you of today's economists spouting off about why we can divert depressions this day in age?

Unfortunately for us...the timer's starting to tick down, and the next batch of crisis cookies are about due out of the oven here in America.

• 1773 - 1794: American Revolution

• 1860 - 1685: American Civil War

• 1929 - 1946: Great Depression...leading to WWII

• 2007 - ??? : Credit Crisis...leading to recession...leading to ???

About every 80 years, America is really put to the test. And remember, history is not predetermined. There was a genuine threat to our nation during each of these preceding crises.

Strauss and Howe believe that these crises are not only unavoidable, but that they are also necessary...to cleanse society, shake out the excesses that have built up over the past three eras, and set everything on a new course going forward.

For further reading on this topic, I'd highly recommend you check out Doug Casey's essay Foundations of Crisis. Doug is one of my absolutely favorite writers and speculators, and he does a great job at breaking down the generational roles referred to in The Fourth Turning.

It's well worth a read - an interesting, well thought out hypothesis, backed up by historical anecdotes and stories. As an investor, it's important to understand potential cycles, so that you don't get blindsided. Protect yourself and your investments, and pick up a copy.

It's Official...Government Motors

The US continues to complete the transition to a centrally planned economy. Like all socialist experiments in history, this one will not end well.

Perhaps the climax of the Crisis stage will see the complete collapse of socialism and big government in the United States. Get your popcorn ready!

In Case You Missed It...This Week's 5 Most Popular Posts...

1. This ain't your grandpa's deflation...This Week in Commodities
2. Marc Faber sees US inflation eventually nearing Zimbabwe levels
3. Jim Rogers' favorite country (surprise - it's not China)
4. Wheat, corn stocks still near 30-year lows
5. How to time the gold market

Positions Update

Big, big week for commodities! The "inflation trades" look like they are on in full earnest - the dollar is hurting, the long bond continues to rise, and the usual cast of commodity characters are all looking very strong.

I didn't make any trades this week, but am giving a hard look at adding an Aussie dollar position. We chatted on May 20th about this...with the A$ at $0.77, we thought it could keep rallying. Well...it has!

Another 3-cents in a couple of weeks - en fuego!

The trend for the A$ is up, up, up.

(Source: Barchart.com)

Current open positions:

Current Account Value: $34,358.15

Cashed out: $20,000.00
Total value: $54,358.15
Weekly return: 7.9%
2009 YTD return: -32.4% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Next Wave of Risky Housing Loans Due to Reset...Soon

Seems like just yesterday that subprime loans were blowing up like the last few seconds of a batch of microwave popcorn.  Pop-pop-pop...now you see them now you don't...keys in the mailbox, see ya later, Mr. Lender.  That loan is now your problem.

The good news is that the bulk of the subprime loans have reset to their higher rates - most of the kernels have popped, in other words.  

The bad news is that there is another bag of popcorn in the microwave...potentially an even larger bag...and it's just getting started!

So if you've been smoking too many green shoots lately, and have got a case of the munchies, pull up a seat while we snack on the next wave of potential carnage in the housing market...

***

The Second Crash – On the Way and Unstoppable
By Doug Hornig, Editor, BIG GOLD

Tuesday, October 9, 2007 started as a nice day in New York City. A lovely early fall day, with the temperature still a balmy 80° at 2:00 in the morning. By evening, though, the temperature had dropped twenty degrees, the clouds had rolled in, there was thunder and rain.

As with the weather, there were some hints of trouble here and there on Wall Street. But all in all, things could not have seemed better. Little did we know, the stormy end of 10/9/07 signaled a very large bubble that had just popped.

That was the day when the Dow Jones Industrial Average hit its historic peak. From there, it was all downhill -- slowly but steadily at first, and then violently after last August -- until the Dow bottomed (for now) on March 9 of this year. Over that span, the index lost 54% of its value.

It’s been a crushing blow to just about everyone. But it’s already being referred to as the crash. As if the unpleasantness were now all behind us. More likely, in the future it will be seen as, simply, the first crash.

Don’t believe it? In a moment you will, when you see the scariest graph of the year.

But let’s quickly recall what’s already happened. During the late, great housing boom, interest rates were at microscopic levels, while bankers were encouraged to grant home loans on little more than a wink and a nudge. In order to inflate their balance sheets, those bankers resorted to all sorts of gimmicky, adjustable rate mortgages (ARMs), whose common feature was an interest rate that would eventually reset. That is, it would balloon somewhere down the road. And those most likely to come quickly to grief were the riskiest borrowers, who held loans known as “subprime.”

“But not to worry,” borrowers were told. “Betting on ever-rising home prices is the safest wager in the whole wide world. If you have problems with cash flow when the ARM resets, your house will be worth a lot more, so you can simply sell it and walk away with a nice chunk of change in your pocket.” Uh-huh.

The bankers themselves were a little more concerned about the deterioration of their portfolios. They took out insurance in the form of credit default swaps (CDSs). These were a brand-new invention in world financial history, allowing mortgages to be sold and resold until they were leveraged 20 times over. They became the shakiest part of a huge global derivatives market, with a nominal value in the tens of trillions of dollars.

For a while, this Ponzi scheme even worked. But then, as they had to, the ARMs began resetting, and there were defaults. Then more of them. Because at the same time, the housing market was cooling off and the economy was stalling out. More and more people were trapped in a situation where they owed more on their home than they could sell it for. Many simply mailed their keys to the bank and moved on.

All of this wreaked havoc in the derivatives market. Sellers of these exotic packages could no longer establish what they were worth. Buyers couldn’t determine a fair price and so stopped buying. As the ripples spread through the world financial system, trust disappeared and liquidity dried up.

Now consider that the base cause for all that dislocation was the subprime sector. And how big is that? Not very. Subprime mortgages account for only about 15% of all home loans. Their influence has been way out of proportion to their numbers, because of derivatives. Here’s the good news: the subprime meltdown has about run its course. These loans were resetting en masse in 2007 and the first eight months of ’08. Now they’re pretty much done.

And the bad news? No one in the mainstream media seems to be asking what should be a pretty obvious question: What about loans other than subprime? Truth is, the banks didn’t just trick up their subprime loans. ARMs were the order of the day – across the board.

Now, here’s that frightening graph we referred to earlier.

Take a good, long look. You can see that from the beginning of 2007 through September of 2008, subprime loans (the gray bars above) were resetting like crazy. Those are the ones people were walking away from, sending a shockwave from defaults and foreclosures smack into the middle of the economy. Now they’re gone.

The ARM market got very quiet between December 2008 and March 2009, hitting a low that won’t be seen again until November of 2011. Small wonder a few “green shoots” have poked their heads above ground. But in April, resets began to increase and will reach an intermediate peak in June. After that, they tail off a little, going basically flat for the next ten months.

It’s not until May of 2010 that the next wave really hits. From there to October of 2011, the resets will be coming fast and furious. That’s 18 months of further turmoil in the housing market, and the beginning is still nearly a year away! (Although the months in between are likely to be no picnic, either.)

While it isn’t subprime ARMs that are resetting this time, neither are they prime loans. Those eligible for prime loans wisely tended to stay away from ARMs in the first place, as indicated by the relatively small space they take up on each bar.

No, the next to go are Alt-A’s (the white bars), Option ARMs (green) and Unsecuritized ARMs (blue). Alt-A’s are loans to the folks who are a small step up from subprime. Unsecuritized loans are a 50-50 proposition; either the borrowers were good enough that they weren’t thrown into the CDS pool, or they were so risky no one would insure them.

Those two are bad enough. But Option ARMs are the real black sheep, loans with choices on how large a payment the borrower will make. The options include interest-only or, worse, a minimum payment that is less than interest-only, leading to “negative amortization”—a loan balance that continually gets bigger, not smaller. Imagine what happens with those when the piper calls.

Once the carnage begins, will it be as bad as the subprime crisis? That’s the $64K question. Perhaps not. For one thing, subprime loans were a much larger chunk of the market when they started going south. For another, there’s been a lot of refinancing as interest rates dropped; that should help ease the default rate. And the government has massively intervened, with measures designed to prop up those who would otherwise lose their homes.

On the other hand, we’re in a severe recession, which wasn’t the case when the subprime crisis started. More people will be unable to meet payments. And the housing market has continued to decline, pressuring both marginal homeowners and banks that can’t sell foreclosed properties.

Is the stock market’s next 10/9/07 on the way? Yes. Which day will it be? That’s unknowable. It could be in a week, or not for another year.

But make no mistake about it, the second crash is coming. It can’t be prevented, no matter what desperate measures Obama and his hapless financial advisors come up with. All we can hope for is that, with a little luck, it won’t be as severe as the first one. But it will last longer. We aren’t even in the middle of the woods yet, much less on the way out.

The order of the day is to be very defensive. There will be few safe havens, but they do exist. Read our report on “48 Karat Gold,” a gold-related, conservative investment that has continued going up even while the common stock market bombed. It’s not too late to profit… click here to learn more.

Marc Faber Sees US Inflation Approaching Zimbabwe Levels (!)

"Dr. Doom" Marc Faber drops the casual obervation in this Bloomberg interview that he sees inflation levels rising in the US...in fact, eventually approaching Zimbabwe levels!

Prompted by a viewer question that asked whether it's more likely the US will default on its debt, or go into hyperinflation, Faber says he "100% sure" that the US will go into hyperinflation.  He sees inflation picking up eventually, and the Fed keeping short term interest rates below the rate of inflation to stimulate consumption.

Which will then necessitate more money printing, and - boom!  Runaway inflation train...leaving the station, never coming back.

They don't call him Dr. Doom for nothing - but ignore Faber at your own peril, he's one of the few guys to call most of the recent financial disaster properly.  The guy is a fabulous thinker and visionary, he knows history down cold, and always sees developments a few steps ahead.

Also of interest in the interview, he believes this could be more than "just a bear market rally" - as he cites money printing and deficit spending as a fundamental event that is capable of driving these types of rallies.  A "crack up" boom he calls it, that "explodes at some point."

He believes Japan's equity markets will perform very well, at least respectively, over the next 5 years, as much of the world has given up on Japan.

Asia is still a favorite of Faber's as a region to invest in...he thinks money that has been in the US and Europe for years will start to find its way over to Asia.

Final tidbit from Faber right at the end...he says Natural Gas is THE most undervalued commodity right now.

Again, you can catch the full interview here - it's a good one.

More Fuzzy Math From Our Favorite Real Estate Agent

I couldn't resist sharing some hot investment advice that just came through my Inbox, from our favorite real estate agent.

To refresh your memory, here was the last gem that was sent over - an explanation about inflation that was, honest to God, the dumbest I've ever heard.

Today's insight is not as "doom and gloom" as the last tip...in fact, perhaps some opportunity knocking for the astute fuzzy mathematician.

***

One highly overlooked opportunity is duplexes. There aren't as much competition for them, they take longer to appreciate but they do produce income. I recommend them as a possibility for a long term investment, or live in one side and rent out the other. Do the math, that's a great plan!

***

Wh-wh-what???  What freaking math?

Buy one stock, sell another - do the math, that's a great investment strategy!

Oy.

Image source: Zazzle.co.uk

Richard Russell: We're Nearing Gold's Mania Phase

Legendary investor and investment writer Richard Russell believes we're nearing the speculative, or mania, phase in gold:

Every major primary bull market that I have studied or lived through ends up with a wildly speculative third phase. This is the phase where the public and the crowd rushes head-long into the market. We saw this last in the years around 2000 when people bought any kind of tech stock. "I don't care what it is, if it's tech, just get me in!"

My belief is that we're now nearing the beginning of the third speculative phase of the great gold bull market...

Read his full piece in today's Daily Crux...

Maybe the upcoming advent of gold dispensing ATM's was enough to tip Russell over the top.

How high will gold go?  It's anyone's guess in a mania...remember tech stocks in 1999?  Casey's Jeff Clark outlines his reasoning why he believes gold will go to $2,000...and then much higher...in this guest article.

Joe Biden Explains the Virtues of Wealth Redistribution

What's the key to getting our economy back on it's feet?

Acccording to Comrade Joe Biden - it's wealth redistribution.  Here he explains "the patriotic thing to do" to Katie Couric:

The people who do not need a new tax cut should be willing, as patriotic Americans, to understand the way to get this economy back on its feet, is to give middle class taxpayers a break.

We take the tax cut they're getting, and we give it TO THE MIDDLE CLASS.

Somewhere...out there...beneath the pale moonlight

Karl Marx is thinking of Biden...and loving his words...tonight.

Jim Rogers' Favorite Country (Surprise: It's Not China)

How about Sri Lanka?

Yes, Jim Rogers loves Sri Lanka...even more than China right now. Why? Because they're close to the end of a 30-year war.

After a war is one of Jim's favorite times to invest - everything is cheap, so there's great value.

Don't worry China bulls - he still loves the Red Dragon too.

Here's the full CNBC interview:

Jim's latest book...now on sale...

How to Buy Physical Gold

How can you buy physical gold?  It's a question that's coming up more and more these days...as demand for gold bullion is going through the roof.

Jeff Clark points out a few resources that you should take a look at, if you're looking to purchase some physical gold.  And it's probably a great time to buy it - it's anyone's guess how much longer we'll see gold under $1,000.

***

Where to Find the Best Deals in Physical Gold
By Jeff Clark, Editor for Casey Research

When gold breached the $1,000/oz mark this February, the mass media were full of reports of unprecedented coin demand and long wait times for bullion buyers. You couldn't open the paper without seeing a piece about the gold rush.

Although the press has now set gold aside for hotter stories, I can tell you demand for gold coins continues at unprecedented levels worldwide, and production is still struggling to keep up. Take a look at these recent reports:

***Sales of the Austrian Philharmonic gold coin soared 544% in the first two months of 2009 (vs. the same period the year before), with production at the country’s mint running quadruple its usual volume.

***The demand for Krugerrands is at its highest level since 1986. The South African refinery recently doubled production of blank gold coins to 20,000 ounces per week.

***China, now the fastest-growing market for gold, saw 2008 sales (measured in dollars) rise by 50% over the year before – and total sales in January 2009 were one billion yuan (US$146 million), 30% more than all of last year.

***The U.S. Mint sold 193,500 one-ounce gold Eagles in the first seven weeks of 2009 – equaling the number shipped in all of 2007 and about matching the first half of 2008.

***Russia's Sberbank says it has “never seen such strong demand for investment coins.”
With this incredible interest in gold, it's worth going over where to go for the best deals in bullion… and what the stated wait times and premiums are. Here are the dealers that have consistently treated their clients (and our readership) well over the years:

Kitco (Kitco.com; 1-877-775-4826). All bullion products are available at Kitco and can be shipped within 24-48 hours of a paid order. Premiums are slightly higher than our other dealers recommended below, but what's particularly attractive at Kitco is that you can get silver for less than 1% over spot... Its pool account is currently charging only 14 cents over spot (premium fluctuates daily), which is a great way to build your silver holdings while waiting for physical premiums to come down.

The Coin Agent (thecoinagent.com; 1-888-494-8889, or email thecoinagent@gmail.com). Wayne Lemonier currently offers immediate delivery on paid orders for all gold coins except the Eagle, which takes two weeks.

Premiums for gold coins are 6% over spot for Maple Leafs, 6.5% for Philharmonics and Krugerrands, and 7% for Eagles (one of the lowest in the industry).

Silver bars are at the lowest premium we know of: A 10-ounce silver bar costs $1.75 per ounce over spot, and 100-ounce bars are only $1.50 per ounce over spot. American silver Eagles are spot + $4.50, and silver Canadian Maples are spot + $4. Shipping and handling for silver is $20 per 100 ounces.

Border Gold (bordergold.com; 888-312-2288, ext. 7). Both gold and silver Maple Leafs are readily available and can ship the day an order is paid. Border told us premiums are slightly higher this year than last because the Royal Canadian Mint raised its prices.

Premiums on gold Maple Leafs are only 5.5%, one of the lowest in the industry. Shipping and insurance is $25 for one or two coins. A one-ounce gold bar is spot + $25; 5-ounce and 10-ounce bars are available in limited quantities at spot + $22 per ounce.

The one-ounce silver Maple Leaf is $4 over spot for up to 99 coins and then $3.25 per coin. Both 10- and 100-ounce silver bars cost $2.50 above spot, with the 100-ounce silver taking a week to deliver.

ASI (assetstrategies.com; 1-800-831-0007). Gold Maple Leafs, Philharmonics, and Krugerrands can be shipped immediately upon a paid order, with American Eagles currently taking about three weeks.

One-ounce gold coins are 7.5% to 8% over spot; Eagles are 8.5% to 9%. One- and 10-ounce gold bars can be had at 6%. One-ounce silver Eagles are $4.30 over spot. A 100-ounce silver bar is $2.20 per ounce, and a one-ounce bar is spot + $2.50. Costs for junk silver vary but average about $2.20 per ounce over spot.

Some of our readers ask… why don't we recommend any of the larger dealers?

Availability and premium are the primary considerations in selecting a bullion dealer. Some of the larger houses may match the prices of our recommended dealers; however, there’s an intangible issue: the hard sell.

Many of the big dealers push high-margin numismatic coins. So while you may get good prices and delivery on your bullion coin, beware the salesman who begins talking up rare coins. You won’t experience this with our smaller dealers, and it’s this no-hassle service that gets our business. If you start to hear, “Hey, my friend, I have a great deal right now on a rare Swiss coin...,” you might want to reconsider where you shop.

Gold is the safe-haven investment in times of crisis, and more and more investors worldwide realize this. But even though gold has risen more than 140% in the last five years, there is something that can give you even higher returns: we call it Toronto’s Secret Gold Investment.

Gold Dispensing ATM's: Coming Soon (Seriously)

From Reuters:

A German asset management company plans to set up 500 "Gold-to-Go" ATMs in Germany, Switzerland and Austria this year. A gold-dispensing automatic teller machine (ATM) was on display at Frankfurt's main railway station for a one-day marketing test yesterday. A one-gram piece of gold, the size of a child's little fingernail and about as thin, cost US$42.25--a 30% premium to the spot market price.

Hey - on our way out to the bar...I'm tapped, need to make a quick stop at the old A-T-M...

Wheat, Corn Stocks Still at 30-Year Lows

Despite record harvests last year, corn and wheat stocks are still sitting near 30-year lows.  Which means, anything short of a bumper crop could send the grains skywards once again.

Here are some very cool charts, courtesy of Chris Mayer at DailyWealth, that depict the stocks-to-use ratios of of wheat and corn since 1970, versus their inflation-adjusted prices.

Investing in grains is actually pretty easy - when supplies are low, and prices are low, you know prices should eventually go up.  Then, at some point, high prices spur enough new supply onto the market that prices come down.  Ideally, that's when you go short!

You'll notice from the charts that grain stocks and prices move in fairly long cycles - about 15 to 20 years in length.  It takes time to bring new supply online, to replenish stocks...ultimately to rebalance the supply/demand situation.

This time should be no different.  China is industrializing in a big way, and its citizens have taken a liking to eating, a habit they're not likely to give up, no matter how bad the global economy gets.  Most notably, they are adopting Western style high protein diets, with lots more meat...and livestock require a lot of grains to raise.

Bottom line - it's safe to tune out the talking heads on TV when thinking about agriculture...just focus on supply and demand.  It's that simple.  When demand exceeds supply, prices will rise, until supply is able to overtake demand.  Sure, things like currency devaluation, a falling dollar, will toss fuel on the fire...but at the end of the day, it's all about supply and demand.

This Ain't Your Grandpa's Deflation...This Week in Commodities

Common wisdom holds that depressions are inherently deflationary.  The United States in the 1930's.  Japan in the 1990's and 2000's.

Combine a depression with other deflationary factors going today in the US - demographics, deleveraging, falling asset prices, even productivity - and you've got some serious deflationary headwinds.

(As a side note - I've warmed to the view that gentle deflation, as a result of increasing productivity, is the optimal, and honest, situation that promotes both savings and economic growth.  It's silly to label all deflation as "bad" or "evil"...how can deflation created by increased productivity be bad?  But I digress.)

Ben Bernanke, a student of the Great Depression, believes that the Depression could have been averted if deflation had been averted.

Determined not to repeat the mistakes of history - or what he thought were the mistakes of history - Bernanke took unprecendented measures...first, lowering interest rates as far as they would go...next, utterly trashing the Fed's balance sheet...and finally, when all else failed, he cranked up the printing presses.

Printing money always leads to inflation...in fact, printing money...or quantitative easing...is inflation.  Rising prices - which follow - are the symptoms of inflation.  

But what if you just print the money "for a little while"?  That's right - print it up, float it out there to keep the economy from grinding to a halt - and then when things are moving again, start to pull it back in.

Doesn't it sound insane?

Well, this is what is being tried.  And as hyperinflationary as this sounds, even the most fervent inflation hounds believe it will be a year or two or three before we start to see inflation creeping into the system.

Too much credit was destroyed, the velocity of money slowed down too much...logical reasoning dictated that it would take the Fed time to print enough to make up the gap...even at the rapid rate in which they were printing.

Then a funny thing happend while we were chilling out, getting comfortable, and generally not worrying about inflation - commodity prices started to move up.  The dollar started to drop.  Bond yields started to climb.

Falling Dollar, Rising Bond Yields = An "Uh Oh" Sandwich

Remember when every investor in the world was worried about the dollar's poor fundamentals?  McDonald's was poking fun at the dollar in it's commercials...music videos were flashing euros...supermodel Gisele Bundchen asked to be paid in euros rather than dollars.

That marked a bottom - at least a short term bottom - in the dollar.  Everyone was on the same side of the trade - short the US dollar.  

When world financial markets collapsed, a global "flight to safety" and massive short covering propelled the dollar up, up, and up.  

For awhile, nobody worried about the dollar's fundamentals...at least in the short term.  The Fed's printing money?  Hey, no problem, the dollar's still the world's reserve currency.  Besides, other countries are printing money too.  Why worry?

In the meantime, the dollar quiety began to slide...and the dollar index is now sitting at its low point for 2009:

It's a quiet race to get rid of US dollars once again. 

(Source: Barchart.com)

Makes you wonder if currency fundamentals do, in fact, still matter...if printing money is indeed bearish for the value of the currency being printed.

Meanwhile, what has The Fed been doing with it's newly printed dollars?  It's been buying long dated US Treasuries to keep yields down!

Nobody else is buying this trash, so it's up to our printing presses to pick up the slack.  The Fed announced this "newly printed cash for trash" program last December - when yields on the 10 and 30 year bonds were dropping, and deflation was king.

Common wisdom held that deflation, combined with these "monetization purchases" by The Fed, would continue to drive rates down...possibly all the way to zero.

But a funny thing happened on the way to Japan...rates bottomed on December 18, 2008, and have been climbing ever since!  Long dated Treasuries have been slammed throughout the first half of 2009!

30-Year Treasuries are not behaving like we're in a deflationary environment

 (Source: Barchart.com)

Uh oh...this is not good.  What a Fed to do?

If they let interest rates rise - that will surely squash whatever is left of the US consumer.  Green shoots turn into marajuana buds - game over.

But the only way to prevent interest rates from rising in the near term (short of cutting government debt, which we know is not going to happen) - is to step up their purchase of long term bonds.

So applying a little game theory to the Fed's current hand - we have to expect them to sacrifice the dollar.

The twist, I believe, is that the dollar could get trashed quite soon.  So I would strongly advise you to take a hard look at your savings and investments - right now.  

Charts don't lie.  No matter what our personal beliefs or biases are about the future, no matter what we think is going happen - we have to defer to what the markets are telling us.  And right now, the markets are starting to say "uh oh."

It could be a breathtaking move out of the dollar - it's value could feasibly get trashed in a matter of weeks, days, or even hours.  Don't be the one left holding the "Old Maid" card as the rest of the world runs for the exits. 

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How to Time the Gold Market
2. The Dumbest Inflation Explanation I've Ever Heard
3. Marc Faber: We've Begun a 15-20 Year Bear Market in Bonds
4. What is the Breakout in Gold Stocks Signaling?
5. Can Commodities Decouple From Stocks?  This Week in Commodities

Positions Update - Back in the High Life Again!

What a week put by the Aussie...while the USD tanked, the A$ soared - moving up over 3.5 cents in one week!

I believe the Australian dollar could continue to rally further from here, and will be holding this position until we see a change in the trend.  Because we know that the trend is our friend!

OJ was down slightly on the week...some rain in Florida to snap the drought.  Prices held strong though...they could be consolidating before the next move higher.  We're still at fairly cheap prices on OJ, so there is room on the upside.

Not to cry over spilt milk - or in this case, spilt sugar - but I should not have "taken profits" in my sugar positions last week.  Just goes to show that when the trend is on your side, you don't sell and wait for a pullback...because it may never come!

Shame on me, and now I sit on the sidelines, waiting for a further breakout to the upside to reinitiate this position.

Finally with a little dry powder sitting around, I decided to "punt" on a Mini Soybeans contract on Friday.  Beans have been extremely strong, driven by demand from...you guessed it...China.  The soybean complex is a favorite of the Chinese - more so than corn and wheat - and as a result, beans have leading the pack as far as the grains go.

Soybeans are on the move, driven by Chinese demand. 

(Source: Barchart.com)

Current Account Value: $31,836.61

Cashed out: $20,000.00
Total value: $51,836.61
Weekly return: 11.6%
2009 YTD return: -37.3% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Stocks Down Today...So What Commodities Did Well?

Regular readers know that we've been anxiously awaiting the decoupling of commodities and currencies from stocks.  These asset classes are historically uncorrelated.  That changed late last year when the financial world ended, and everything went down the crapper at about the same speed.

Except, of course, the US dollar and bonds...but I digress...

Today stocks were down...the DOW dropped about 100.  These are the days I love to watch...so we can pick out the notable performers.  

Good performances from today...

• Gold...up $13.80 to close at $951
• Silver...up $0.16 to close at $14.44
• Coffee...up 2.50 to close at 135.80
• Sugar...up 0.24 to close at 15.62 (this is why you never take profits, like I recently did, to wait for a pullback...it may never pullback, and you lose your position)
• Soybeans...up 6 to close at 1175

The dollar got hit today...long dated US Treasuries got slammed BIG...makes you wonder if we're starting to see a return to fundamentals.

Gold and silver look like they could be gearing up for some big moves.  Sell in May and go away?  Maybe not quite yet.

Also, it's nice to see sugar up on a day when oil was down.  It was dumb of me to give up that position...

Get Ready For Another "Lost Decade" in the US

Another "lost decade" is probably about the best Americans can reasonably hope for, based on this compelling case made by Mike "Mish" Shedlock over on his blog.

Bottom line is that, over the last 20+ years, Americans spent too much money, and ran up too much debt.  Now, like it or not, we'll be forced to start saving more money, and paying down our debts.  

When people save money and pay down debt, they have less money left to spend on $5 lattes and Vegas hotel rooms.  So expect that we'll see luxury goods continue to "revert to the mean"...this country just built too much stuff, and sold it to people who couldn't pay for it...well out of real savings, at least.

But all is not doom and gloom here at Commodity Bull Market Central!  We'll be cashing in our fat futures gains and silver bullion for discounted Vegas rooms and cheap lap dances...for pennies on the dollar...yeah Greater Depression!

"Show me you love me, baby..."

Remember when times are crappy - it's like the story of the two hunters in the forest.  One hunter is worried about outrunning this bear that is chasing them.  The other guy goes: "I don't need to outrun the bear...I just need to outrun you!"

Read Mish's full piece here...complete with some great charts...

Thanks to good friend, reader, and basketball teammate Jon Lederer for sharing this piece.

How Much Longer Can the Australian Dollar Rally?

The trend is our friend...and right now, the trend in the Australian dollar is up, up, and up.

Source: Barchart.com

A couple of weeks ago, we took note of the rally in the Aussie - and decided to initiate a position.  Boy am I glad we did...since that time, the A$ has rallied nearly 4-cents, and is currently sitting above the $0.77 mark!

Can the rally continue, or has the A$ come too far, too fast?  If you're trying to decide what to do with your position - or deciding whether you should initiate one here - I'd highly recommend checking out this informative video on where the Aussie could be heading, courtesy of INO.com's Adam Hewison.

As you may recall, I expressed concern over the weekend that the Aussie had not yet decoupled from stocks.  Well our favorite currency analyst, Everbank's Chuck Butler, believes the Aussie may be close to cutting this link:

So, as I just said, Tuesday saw the currencies trade right back to the levels they enjoyed VS the dollar last Thursday, before risk assets began to sell off on Friday. These are the types of trading patterns you normally see when the assets involved are getting ready for a break out... A jail break... Tonight there's going to be a jail break!

OK, I'm not saying that the jail break takes place tonight, I just broke out in a song from the 70's... That's all... Seriously though, I hope we're seeing a return to fundamentals.

What's the easiest way to trade the A$?  Check out the ETF FXA...that's probably your best bet.

Or, if you're looking for a way to diversify your personal savings, you can check out a foreign currency account from Everbank.

Further reading on the A$:

• Can Commodities Decouple From Stocks?
• Australian Dollar Still Kicking Ass
• A$ Hits 6-Month High...Can It's Rally Continue?

Great Quote on Why Government Can't Create Wealth

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. 

What one person receives without working for, another person must work for without receiving. 

The government cannot give to anybody anything that the government does not first take from somebody else. 

When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."

~~~~ Dr. Adrian Rogers

Editor's note - Guess what percentage of our country is a net receipient from the Federal Government...meaning they receive more in handouts than they pay in taxes?

Over 50% (!)  Uh oh...

Does the thought of government handouts make your stomach turn?  You'll love The Market For Liberty, which we reviewed here earlier this week.

Andy Kessler: You Can't "Print" Prosperity

Famed hedge fund manager and Silicon Valley guru Andy Kessler says this is a sucker's rally...you can't print prosperity, it comes from productivity.

"Bernanke's cranking the handle on the printing press to help the public fund the bank problems instead of the US government...as soon as he stops cranking the handle, the bottom falls out on this thing."

"I don't want to be the sucker buying into this market."

"You can't print prosperity."  

Pure gold from Andy, as usual.

Check out his full comments at the 18-minute mark of this video:

The Market for Liberty - Book Review

The Market for Liberty, by Linda & Morris Tannehill, is an extremely thought provoking book that asks the outrageous question:

Is government itself an unnecessary evil?

The Tannehills do not just make the case for smaller government...for less government in our lives. They make the case for NO government!

This was a challenging concept for me to grasp. Regular readers know that I'm of the mindset that less government is usually better...but no government? Isn't that...anarchy?

It's tough to imagine no central authority whatsoever. Who will settle disputes? Who will protect us from foreign aggression? Who will protect justice and keep the peace?

All of these questions are answered in a very well thought out manner in The Market For Liberty. The Tannehills describe a Laissez-Faire society that, to be honest, sounds pretty damn good. No bureaucratic regulation. No politics. Everyone is accountable to the free market, not to a central authority which can be lobbied and swayed.

If you have any libertarian leanings, I'd urge you to read this book. (And if you don't - don't bother, you won't be able to follow). For me, this book was a real tipping point in my thinking about government and the free market. To be honest, I had put off reading it for a little while, because I didn't think I was ready for it.

The entire case for the free market is very intellectually engaging and energizing. The Tannehills wrap up by asking: How can we go from government to laissez-faire? The answer may surprise you, as they do not advocate government overthrow, or even peaceful disobedience.

I'll let you read it for yourself, and then we can circle back at this space and compare notes. The book is out of print, but there are some copies available on Amazon - I've got a link below. And even better - if you don't mind reading this on your computer - here's a free PDF version (thanks to Doug Casey for finding this link).

I believe this book is more important now than ever before - and critical to our investing success.  With the amount of government intervention in the markets at levels never seen before in the US, I'm trying to figure out when we'll reach the "tipping point"...when the public sectors basically chokes or crowds out the private sector, and the economy is permanently disabled.

Why The Government Will Have To Monetize The Federal Deficit

Seems like the government has never made a deficit projection it couldn't miss.  Well believe it or not, things are about to get a lot uglier than any of us had expected.  

Casey Research's David Galland, one of the very best investment writers and thinkers in my opinion, writes that falling tax revenue is going to force the government's hand very soon.  What does it mean for your investments...and livelihood?  Read on to find out...

***

Tax Revenues Tanking
By David Galland, Managing Editor, The Casey Report

While everyone else has been focused on the banks’ stress tests and how much government is spending to bail out troubled “too big to fails,” a disturbing trend on the other side of the equation is now emerging: how much (or rather, how little) the U.S. government is receiving in tax revenues.

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

Here’s what’s going on:

• In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.

• Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

• When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.
  

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

In other words, events are rolling out almost exactly as we have been anticipating. Below, for example, are some useful excerpts from an April 3 article titled “Widening Deficits” by Casey Research CEO Olivier Garret. To quote…

In the midst of the Great Depression, the 1931 federal tax revenues had fallen by 52% from their 1929 highs. While we do not expect anything that dramatic in 2009, it would not be unrealistic to see a 20% to 25% reduction in cash flow from tax collections this tax season. Such a drop would pose significant challenges given that spending commitments are off the charts and climbing.

Later in that same article, Olivier continued,

In the absence of sizeable increases in tax revenues, it is quite clear that the lion’s share of the planned sales of Treasuries in 2009 cannot be met by demand from the market. Either the Treasury will have to raise interest rates significantly, or the Fed will need to step in very aggressively to support the planned auctions. Our expectation is that both will happen. Auctions will fail and the Fed will step in. The market will react to more printing by anticipating inflation and demanding higher interest rates. Once the cycle starts, it will be very hard to pull interest rates back.

We continue to stand by our December forecast that the 2009 budget deficit is more likely to widen to levels between $2.5 and $3 trillion rather than the CBO’s $1.8 trillion forecast. We also believe that inflation could start setting in as early as Q3 of 2009 and will accelerate sharply by 2010. Treasury Rates will start climbing and the era of cheap money will end, making it harder for overleveraged consumers, businesses, and governments to service their debt.

Olivier’s forecast of failed auctions and rising interest rates on Treasuries proved more prophetic as a May 7th story from Bloomberg reported:
Treasury 30-year bonds fell the most in four months as investors demanded higher-than-forecasted yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year.

“This is a problem,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of 16 primary dealers required to bid in Treasury auctions. “The market required a fairly significant discount to buy the bonds.”

Thirty-year bonds have lost investors 20.9 percent this year, Merrill Lynch & Co. indexes show, as the Treasury increases securities sales to help fund a swelling budget deficit. Yields climbed to a six-month high today as the auction drew a yield of 4.288 percent, higher than the 4.192 percent average forecast in a Bloomberg News survey of seven primary dealers. Demand was below average, judging by total bids.

The benchmark 30-year bond yield climbed 23 basis points, or 0.23 percentage points, the most since Jan. 5, to 4.316 percent, at 5:25 p.m. in New York, according to BGCantor Market data. It was the highest yield since Nov. 14. The 3.5 percent security due in February 2039 dropped 3 15/32, or $34.69 per $1,000 face amount, to 86 3/8.

The 10-year note yield increased 16 basis points to 3.345 percent, the highest since Nov. 24.

Two-year notes yielded 1 percent for the first time since March 18, while the rate on the three-month Treasury bill was 0.18 percent.

So, what does all this mean?

As per above, the rock-and-the-hard-place scenario we have been predicting is unfolding before our eyes. At this point, other than sharply changing course and letting the free market cope with the crisis through a brutal “survival of the fittest” scenario, the government is left with no other option than to accelerate its buying up of its own debt.

Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for the stunning rise in interest rates we are now positioning ourselves for in The Casey Report (and, you can too… learn more).

Ed. Note - I subscribe to the Casey Report myself...it's my favorite of all investment newsletters that I have.

Can Commodities Decouple From Stocks? This Week in Commodities

The biggest investing mistake I ever made was not getting out of commodities during the Great Deleveraging of '08/'09.  

I had a pretty good beat on the major trends - stocks were highly vulnerable, the US could be in for some very bad things, etc - but I failed to project the effect that a complete financial collapse would have on commodities.  I followed my stops but kept trying to re-enter the market too early.  Being on the wrong side of a trade, well, sucks.

In 2004, I read Hot Commodities by Jim Rogers, and my investing outlook and thesis completely changed.  I realized that commodities, not stocks, were the place to be for the next 15-20 years.  That spawned my foray into trading, and eventually this blog as well.

The fundamental factors of the commodity bull market are still intact, I believe.  No market goes straight up...commodity markets are certainly no exception...and now we've got a very attractive entry point for many commodities.  Prices have come down considerably, and as a result of this financial mess, supply has come offline a great deal, laying the ground work for a doozy of a boom, if/when the global economy picks up again.

Now here's the risk I see - during the Great Deleveraging, correlation of all assets basically went to one (exceptions were the US dollar and Treasuries).  So any well laid out diversification plans were all in vain.  In fact, I think we're starting to see that diversification is a load of crap, a product of the 1980's/1990's bull market in equities.  Probably something we could discuss at length in a separate piece.

Van Tharp, an excellent trading coach and author, is fond of saying that you do not trade markets - you trade your beliefs in the markets.  Every decision you make is filtered through your belief system.

So while I believe in the commodity bull market in the medium to long term - I also believe this is a bear market rally we're currently experiencing.  I believe stocks are still overvalued, and that we haven'tyet  seen the final lows on the S&P and the DOW.  I believe the DOW/Gold ratio will eventually settle close to 1, before a new bull market in stocks begins.

Now these are my beliefs.  You have your own beliefs about the market, and if they're not aligned with mine, then my trades and thinking won't make any sense to you.  (Actually if I am making sense to you, that's when we should all be worried!)

OK so here's my dilemma - stocks are going lower I think - maybe sooner, maybe later.  The last time stocks went lower, commodities got slammed.  Therefore I have reason to be nervous that the next leg down in stocks could wallop commodities as well in the process.

To test this hypothesis, I'd like to pull up some charts, and see how some of our favorite investment ideas have been performing relative to the S&P 500 - and figure out which ones, if any, have managed to decouple from stocks.  (All charts courtesy of Barchart.com)

Observations:

• I had expected a tighter price correlation between oil and the S&P
• The Aussie dollar looks like trouble!  It could be quite vulnerable to a downturn in stocks.
• OJ looks like it may have decoupled from the S&P

CONCLUSION: I think it's safe to get back in the water on some select commodities - but be careful!  I still believe agriculture is our best bet, and right now I like OJ's chances the best...especially given it's performance on crappy days for the S&P.

In Case You Missed It...This Week's 5 Most Popular Posts...

1. The Dumbest Inflation Explanation I've Ever Heard - thanks to our friends at The Daily Crux for picking this one up
2. A Bear Market Rally on Roids?  This Week in Commodities
3. Richard Russell Blasts Government Sachs
4. Jim Rogers: The US is About to Have a Currency Crisis
5. Is Oil Going to $30 or $300?

Positions Update - Feels Like Old Times!

I got out of both sugar contracts on Friday...booking a nice profit on one, and a very slight loss on the second.

My pyramid was beginning to invert - not a desirable thing - so I pared back the second sugar contract after it went negative.  Then after thinking about it, I pulled up the long term sugar chart and thought that the market, while definitely trending up, may have gotten a bit ahead of itself.

So, we'll book some profits there, and look for an attractive entry point.  

I have to admit - I much prefer having a long sugar position than not.  Having no sugar position is like my wife being out of town - a little bit of an empty feeling, like I'm incomplete.  Sugar, you complete me - let's get this price pull back out of the way quickly, so we can reunite.

By the way, I think I pretty much guaranteed myself a crappy week after my self congratulatory post last Sunday.  I was starting to feel pretty smart...which is always dangerous...in fact, here were my exact words:

What a week! And the recent weekly winning streak rolls on...in a big way...

Now that I've got my confidence back a little bit, I'm probably quite dangerous to myself at the moment!

Anytime you read crap like that from me in the future, you may want to just short everything I own - a guaranteed winning trade.

Current Account Value: $28,539.11

Cashed out: $20,000.00
Total value: $48,539.11
Weekly return: -8.3%
2009 YTD return: -43.8% (Don't call it a comeback!? :( )

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

81% Tax Increase Required to Fund Social Security, Medicare Obligations

Sometimes when it rains, it freaking pours.  

Surprise, surprise - Social Security and Medicare are in worse shape than previously believed.  Bruce Bartlett writes for Forbes that an 81% tax increase will be required to properly fund these social safety net programs in the not so distant future.

The rub is that all of the money that has been paid into these programs - money that was supposed to be socked away - has been spent by our fearless leaders.  So when these programs turn "cash flow negative" - which was previously estimated at 2017, but appears to be approaching much sooner - the Federal government will be in a heap of trouble.

How will the government get itself out of this mess?  Actually, it probably won't.  But you can count on some combination of the following actions:

1. Reduced benefits and coverage in these plans
2. Higher taxes to fund what's left
3. Newly printed money to "inflate away" these obligations

Harvard Student Busts on Barney Frank

Here's a hilarious clip of a bright Harvard student with the gall to take Barney Frank to task.

How dare he question the misuse of hundreds of billions of dollars that the US will never be able to pay off.

Warning: Step away from any sharp objects before you click play...you may want to punch Barney Frank right in the glasses.

Watch 5 Million Jobs Disappear Right Before Your Eyes

More than 5 million jobs have been lost in the US since March 2008...now you can relive the memories with this neat resource.

Chris Wilson of Slate put together a very cool interactive map that illustrates regional job gains and losses for the past 2+ years.

If you felt cheated by the Swine Flu's inability to get traction, you'll be delighted to see this.  Just click the play button, kick back, and watch unemployment spread like a pandemic throughout the nation.

Hat tip to John Mauldin for pointing this out in his weekly e-letter.

Is Oil Going to $30 or $300?

Last week, with oil pushing $60/barrel, CNBC asked the question: Is oil going to $300?

On cue, crude fell this week, to close at $56.  CNBC can have an uncanny ability to signal short term tops.

Where is crude heading from here?  Some folks believe the bullish supply/demand fundamentals that drove crude north of $140 still in place, while other experts say there is plenty of crude on the market right now, and no reason for crude to be north of $40 right now.

In this guest article, Casey Research's Marin Katusa takes a stroll down memory lane to review where crude has been, and analyze where it may be going from here.  

I think very highly of Marin's work, and am a subscriber myself to his Casey Energy Opportunities publication...if you like his analysis, there's a special link at the end of the article where you can grab a free trial.

***

The Price of Oil
How did it get here, and where is it going?

By Marin Katusa, Senior Editor, Casey Energy Opportunities

What a difference a year makes.

While March lions and April showers were at work in 2008, so were these factors in the U.S. and global economies:

• The Dow Jones Industrial Average remained steady above 12,000.

• The leading indicator of existing home sales was down over 21% from the previous year, and the official unemployment rate was just beginning its upward creep by crossing the 5% mark.

• The first official admissions of the “R” word. In early April 2008, the International Monetary Fund (IMF) declared a 25% chance of a global recession, and Federal Reserve Chairman Ben Bernanke told Congress that gross domestic product “could even contract slightly.”

• The novelty of bailouts began. Bernanke also assured Congress that the Fed's emergency authorization of a loan against $29 billion of Bear Stearns assets wasn't putting taxpayer money at risk: “I feel reasonably confident that we'll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that.

• The dollar's six-year slide against the euro, hitting its lowest ever at $1.60 in late April. It also fell below the 7-yuan mark in China for the first time.

• And oil, comfortably above $100/barrel, was heading for its summer crest of $147.

• A scant 12 months later, the Dow is trying to stagger back from a plunge to 6,500. Home sales are hinting a possible turnaround, unemployment (even the official, conservative figures) is expected to reach double digits before long, “recession” and “bailout” are household words (often accompanied by four-letter ones), the dollar is recovering... and a barrel of oil is worth half that hundred dollars. Hardly worth pulling out of the ground.

What happened? And even more important for us as investors, what's going to happen?

The Casey Energy Opportunities team pulled together the pieces of the oil sector picture that other sources tend to scatter or ignore. We’ll give you a broader understanding of the drivers within the oil industry, the markets in which they operate, and how you can use that knowledge to push your profits upward.

The Oil Industry Now: A Rock, a Hard Place, and a Supply Glut That Isn't

Everyone who drives a car or heats a home with petroleum has welcomed the fall in oil prices from their high in the summer of 2008.

While it's hard to argue that filling your tank at $2 per gallon is a lot easier on the wallet than $4 or $5 per gallon, the broader economic effects of such low oil prices are troubling.

Leading the concerns is the drop in oil exploration and drilling that accompany a drop in price. Below the $50/barrel mark – and for many companies the bar is closer to $65 even for conventional fields – oil producers typically spend more money getting oil out of the ground than they can recoup by selling it. At the same time, turbulent financial markets have tightened credit. These two factors have pressured producers to allocate exploration budgets away from drilling projects and toward meeting debt obligations and day-to-day operating costs instead.

The plunge in prices has consumed the cash buffers of even the major oil companies. ConocoPhillips, for example, announced in January that along with eliminating 1,300 jobs and writing down $34 billion in assets, it was also planning to cut its 2009 investment budget by 18%. Exploration projects are part of both writedowns and spending cuts. The results of curtailed exploration are two-fold. First, some oil companies will be simply unable to survive the economic crisis. Second, supply in the longer term is being sacrificed to stay afloat now.

Storage facilities are bulging. The chart below shows the contents of the Cushing, OK, storage facility — where NYMEX deliveries take place — have recently doubled from their average 2008 volume. Along with a host of other facilities around the world, it got this way because of an unusually dramatic contango at the beginning of 2009. (A contango is a kind of market inversion, when the current [spot] price dips lower than the future price.)

In January, the spot price of oil plummeted as low as $37/barrel, while futures for July delivery were trading for $52. That meant if an oil company could buy and store product for seven months, it could lay out $37/barrel and be guaranteed a profit of $15 – or 40%, minus costs – in July. And indeed the buying frenzy took off, reinforcing the decision to turn off the drills.

So for the moment, we are artificially flush with oil, and demand has dropped as the global economy will likely shrink for the first time since World War II. It’s no surprise that oil prices have been staying down.

Many analysts say we won't feel the effects of declining exploration for a few years. But the numbers are emerging already. According to the U.S. Energy Information Administration (EIA), non-OPEC countries demonstrated an average annual growth in supply of 570,000 barrels/day from 2000 through 2007. In contrast, they recorded a drop last year of some 300,000 barrels/day.

At the same time, OPEC appears to be conforming to its production cuts of 4.2 million barrels/day, begun in September 2008. The oil cartel is known to announce cuts that its members don't actually follow; it's in their economic best interest, if only in the short term, to sell all they can. But this time, oil has plunged far below levels to sustain their economies. Even Saudi Arabia expects to run a budget deficit this year.

OPEC, which produces about 40% of the world's oil, would like to see prices around $75/barrel, at least. But the fragile global economy would have a difficult time absorbing such a price at the moment, and the cartel decided against further production cuts when it met in March. In fact, some three weeks later, Saudi Arabia actually announced a price cut on all its grades of crude to European, North American, and Mediterranean markets – a dramatic attempt to spur demand amidst high inventories.

So, entwined as it is with the economy, the oil industry is currently in a conundrum. The fix it requires – higher prices for its product – will choke the framework in which it operates.

At the same time, we've got supply problems ahead.

How Did We Get Here Anyway?

Like many aspects of the markets, movements in price are driven partly by real factors and partly by perception. Rags-to-riches-to-rags-to-riches Texas oilwoman Sue Sanders summed it up when she noted wryly in her 1940 autobiography that “nothing succeeds like reports of success.”

Last year's run-up of oil was no exception: part real, part report. Some of the real factors:

• The weak U.S. dollar. The United States is not the only country that buys oil in U.S. dollars. The price per barrel is pegged to it, in fact. When the dollar is weak, the cost of U.S. exports drops; and indeed by December 2008, the U.S. trade deficit had fallen to its lowest in nearly six years ($39.9 billion, according to U.S. Commerce Department data). However, a weak dollar means it takes more dollars to buy a barrel of oil. Global concerns over the strength of the U.S. economy, including America's ever-rising level of debt, had undermined the dollar to the point that OPEC members began to murmur about dumping it for the euro or a basket of currencies.

• Geopolitical turbulence in oil-producing countries. The Iraq war, oil-related militancy in Nigeria, and Iran-Israel-U.S. posturing over nuclear issues were hotspots in the first half of 2008. The average nightly news covered casualties in Iraq, but industry watchers tracked attacks on pipelines and oil facilities. Likewise, in Nigeria, sabotage and oil worker kidnappings by militant groups such as the Movement for the Emancipation of the Niger Delta (MEND) regularly shut down facilities to repair, negotiate, or improve security. And as spring warmed up, so did the war of words between Iran and Israel. By early July, Iran had gone so far to indicate it would move against shipping in the Persian Gulf if attacked. The United States would have moved next, of course... thus driving up the price of oil in the jittery oil markets, which depend on Persian Gulf shipping lanes.

• Unusually low crude and gasoline supplies entering the 2008 summer driving season. In early April, the EIA reported significant drops in supply – gasoline declined by 4.53 million barrels and crude oil by 3.2 million barrels, a one-two blow that surprised and worried industry watchers. Behind the gasoline slump were lower refinery margins, called crack spreads. In mid-March, when refineries would normally be coming off their maintenance schedules to churn out gasoline for summer driving, the margin for turning a barrel of crude into gasoline was negative for the first time in three years. Refineries sought profits in other oil products, and the markets responded to the expected imbalance in supply and demand.

• High demand. China is a stand-out here, and for more than its usual energy appetite. China has a penchant for aiming to break records – from its goals in five-year plans and building projects to its haul of Olympic medals – and in the first half of 2008, it was visited by some dramatic examples: a great earthquake and major snowstorms, events that disrupted the country’s energy industry. Combine that with the fact that China was also preparing for the Beijing Olympics in August, and it’s easy to understand why it was buying oil very heavily until mid-summer.

On the perception side of price drivers, it's hard to overlook the fact that the market push stayed strong in the face of increasingly gloomy economic data. Casey Research was earlier than most in predicting the economic crash (we published reports such as “The Coming Currency Crisis” in June 2006), but by spring 2008, even officialdom was dancing around the word recession.

Normally, news of burgeoning foreclosures, plummeting home sales, spiking personal and business bankruptcies, rising unemployment, and other economic indicators would tend to exert a bearish influence. After all, consumers generate 70% of U.S. economic activity, and if they stop or cut back on driving to work or the shopping mall, telephone relatives or business partners instead of flying out to see them, reduce purchases of items containing plastics, turn down the thermostat, and other weather-the-storm measures, oil consumption should decline.

It took months for all these drivers to realign – but as we all know, they did, and then some. The chicken-and-egg debate, whether oil's sky shot triggered or portended the economic debacle in the closing months of 2008, will require more distance and data to resolve. But it's true that the dollar had started its comeback by mid-summer, supply had caught up, geopolitics had settled a bit, China backed off on its buying, no major hurricanes hit – but economic realities did.

Meanwhile, Congress jumped up and down and cried “Speculators!” “OPEC!” “Oil producers!” in tidy sound bites.


The Next Big Plays: Where You Need to Be

Oil companies are influenced by the range of market drivers and economic conditions according to size. The junior oil producers, those with market capitalizations of $250 million or less, have the small-business advantage of flexibility when times are good. These times aren't good, of course, and even well-managed juniors with good projects are in trouble. Their vulnerability is in the credit market. You’ve likely heard of credit lines being revoked and refinancings denied to people with impeccable credit. Now imagine pitching a drill project without a wallet full of assets ready to lay on the table.

Mid-tier producers, with market caps between $250 million to $2 billion, will look to mergers and acquisitions to survive. The majors ($2-20 billion market cap) and Big Oil (over $20 billion) will also be shopping. With low oil prices shutting down exploration, development, and even production, these companies will be looking to replace their reserves instead by purchasing smaller, solid companies with proven production. It's simply cheaper.

We see two ways to profit from this trend.

First, we buy shares in undervalued, producing companies that are profitable even below $40/barrel, are best of peer, and own large reserves. These are the companies that Big Oil will be looking to acquire. One such company, an oil sands producer, is currently a part of the Casey Energy Opportunities portfolio.

Second, we believe that owning a potential consolidator is the best position. As debt load and low commodity prices overtake them, junior producers will be forced to consolidate their projects. We currently own one such candidate, and are scouting for others with such muscle. Consolidators will be purchasing projects from the bank at 25 to 30 cents on the dollar.

Our tactics have already paid off handsomely in the last six months: all our recent recommendations have been on fire. A few tripled their value, and one generated a return of 540%.

As we’ve seen, supply problems are looming, no matter what timetable of Peak Oil you may believe in. With increased demand inevitably come higher prices. Our approach at Casey Energy Opportunities positions us to take advantage of the trend in both the short and longer term. And we guide our subscribers not only when to buy or sell, but also when to take profits and a “Casey Free Ride” to eliminate risk.

We’d like to offer you the opportunity to kick the tires of Casey Energy Opportunities RISK-FREE for 90 days, with 100% money-back guarantee. Click here to give it a try.

Deflation Risks Subsiding...Goldilocks Has Been Achieved

Ben Bernanke was right – if you put your mind to it, and print enough money, you CAN prevent deflation.

New CPI numbers show that the core CPI (excluding food and energy, which nobody really uses anymore) actually jumped 0.3% last month, their largest increase since June 2008. About 40% of that increase came from tobacco taxes though, so you can bet our economic leaders are congratulating themselves on a “Goldilocks” inflation/deflation scenario.

Now they just have to figure out a way to put all that newly printed money away – shove all that toothpaste right back in the tube - and we’re all set.

Recommended reading: Andy Kessler on why Bernanke should spell out plans to combat hyperinflation.

What is the Breakout in Gold Stocks Signaling?

Our buddy Brian Hunt pointed out in yesterday's DailyWealth that gold stocks are breaking out. 

GDX, the ETF for gold stocks, has more than doubled off it's late October lows, and is not perched at its high water mark since August 2008.

Gold stocks are on the move

So should we sell in May and go away?  Or is the trend our friend?  So many cliches to choose from - only one can be right!

I think you're nuts to close any gold related positions right now.  Gold stocks appear to be leading the price of bullion, which is often a bullish sign.  Remember that the paper market for gold is easily manipulated - follow the phyical market.

Those of you who did just that back in December - when the paper price of gold were bottom, get gold buyers were snapping up the barbarous relic in record numbers - are probably sitting pretty right now.

Now remember that gold stocks are leveraged on the price of gold.  If the price of gold doubles, gold stocks will do more than double - they will go to the moon.  That's because they're doubling their sales price, while costs remain more or less the same (assuming oil does not rise in parallel).

So what if you want to get really, really stinking rich?  One way to play it - with a small speculative portion of your portfolio, of course - is by investing in junior gold producers.  They are some of the most volatile stocks in the world, but if gold skyrockets, these juniors are going to do some absolute moonshots.

One junior that is extremely worth of your consideration is AuEx Ventures.  Last fall, our local Casey Research group hosted Ron Parratt, CEO of AuEx - I was so impressed that I bought some shares the next day, which I still own.  Here's a full write up about AuEx if you're interested in learning more.

If you're looking for some guidance in navigating the potentially profitable but trecherous waters of junior gold miners, I'd recommend you take a look at International Speculator, a reserach service provided by Doug Casey's guys.  I've subscribed to it over a year now.  

The thesis is that if gold hits a real mania stage, the juniors will be the ones doing real moonshots, because they are highly leveraged to the price of gold for a number of reasons - maybe first and foremost, because the large gold producers are not doing much of their own exploration any more, they buy up juniors with promising finds.  So if things get out of hand, as Casey's guys are predicting, they believe the junior market will turn into something like the tech bubble in '99.

The Dumbest Inflation Explanation I've Ever Heard

This is - by far - one of the stupidest things I've ever read.  This gem came in a monthly e-zine sent out by a real estate agent who got her hooks into me after the housing bubble started to pop, smelling fresh virgin real estate blood in the waters.  Needless to say, we're still renting - and buying commodities.

For your amusement - yes this is a real copy/paste.  I used initials to protect the innocent.

Dear Brett,

Fight inflation, buy a home! 

CJ heard someone say that recently. Makes a lot of sense to us! Every time someone buys a home, potentially hundreds of people get paid. That has a huge impact on the economy. Especially is this so in new construction. So, while it seems the government is being generous in giving away thousands of dollars in tax credits to people who buy homes this year, the government sees the tax credits as a sound investment! The economy gets back far more than the tax credit when you buy a home. AND, more home purchases might mean less government borrowing. High borrowing may fuel inflation. So, who's the next person you know who wants to buy a home? Please call us with their name and number and do your part to assist the economy. Thanks.

;hgerh;g'ersadg

Brett again...that was me smashing my head into the keyboard...3 times

For a more insightful look into inflation, check out Bud Conrad's article Battle of the Flations.

Marc Faber Loves Agriculture at These Prices

Marc Faber says that investing in agriculture today will be like investing in oil in 2001, when it was priced at $17/barrel, according to The National Post.

Faber says that record low inventories, declining agricultural productivity, and increasing demand for food will drive prices higher.

The falling productivity line is especially interesting...Faber says productivity in agriculture has been declining since 1990, and expects that trend to continue.  If this is true, which I'd imagine it is, it's counter to what most folks (including me) believe.

Read the full article here...

More reasons to invest in agriculture:

• Jim Rogers loves the fundamentals too
• Sugar especially has an appealing supply/demand situation shaping up

Ed. Note: Stay up to date on the latest in agriculture and be sure to check out our weekly insights published every Sunday: This Week in Commodities

Richard Russell Blasts "Government Sachs"

Great rant from Richard Russell today on the company that runs our Federal Government - Government Sachs:

It's now obvious that the Fed and the Treasury want, above all, to save the banks. Everything else is secondary. It's also increasingly obvious that the bankers own the nation and that Goldman Sachs runs the nation and the banks. The whole thing is so flagrant that my head spins. And what Goldman doesn't control, the Pentagon controls.

Click here to read the whole rant at The Daily Crux...

Jim Rogers: The US is About to Have a Currency Crisis

If you have the majority of your savings in US dollars, this may be the most important insight you ever hear from Jim Rogers.

In an interview with Bloomberg from this morning, Rogers said:

“We’re going to have a currency crisis, probably this fall or the fall of 2010.  It’s been building up for a long time. We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”

Jim reiterated that the place to be invested is in commodities, particularly agriculture:

"You're going to have serious food shortages in the next 3-5 years - prices are going to go through the roof."

You can view a video of this entire interview using this link (click on the "Video" tab on top).

Want some ideas about agricultural commodities with particularly appealing fundamentals right now?  Check out This Week in Commodities, which is heavily focused on agricultural commodities - right now we're invested in sugar and orange juice, both profitable trades to date and still climbing.

More recent insights from Jim Rogers:

• Rogers believes world is heading for Depression
• Jim interviewed by GoldSeek Radio
• Rogers prefers oil over gold right now

Ed. Note: I just got done reading Jim Rogers' new book - review to follow. Long story short, it's an insightful, quick read that I'd highly recommend. Pick up a copy if you haven't already:

Free Commodity Webcast From US Global Investors

Here's a fantastic - and free - webcast, courtesy of Frank Holmes and the team at US Global Investors, entitled Commodities: Reasons to Be a Bull When Everyone's a Bear.  It was originally recorded on April 21st.

It runs almost an hour, and is definitely worth a watch if you are a serious commodities investor.  These guys really know their commodes.  Some notes I took of the most interesting/surprising points I heard:

• It usually takes 6-9 months for new money injected into the system to find its way into commodities...this is starting to happen already, and they expect a big 2nd half for commodities

• Nice profile of China starting around minute 25...they think the Chinese economy is ready to rock and roll here

• And China's now a net importer of coal once again

It's Time to Short Oil: CNBC's Debating $300 Oil

When CNBC starts asking if oil will hit $300 anytime soon, that probably means we've got a short term top in place.

In fairness to Kevin Kerr - I think very highly of his commodity insights, and this interview is worth watching...his points are all good ones.  

However if you're contrarian trading against CNBC - usually a profitable strategy - that would indicate oil is a short here in the near term.

How to Time the Gold Market

I've learned - the hard way - that the best way to time the gold market - is not to time it at all.  Remember last summer after the government bailed out Fannie/Freddie, and it looked like a sure bet that gold was heading to the moon?  

Well that didn't pan out - yet.  But if you believe, as we do, that printing money will eventually lead to inflation (as it always has every other time it's happened in history), then you may want to position yourself ahead of the herd into some gold positions, if you haven't already.  So if you don't yet have a full position size, is now the best time to load up?  Read on to see what Casey's Jeff Clark has to say.

Gold Stocks – the Best Strategy for Portfolio Building
by Jeff Clark, Editor of BIG GOLD

October 27, 2008 was the gold mining sector’s Black Monday, the day nearly every stock hit rock bottom. Hindsight makes it plain they got caught in the violent deleveraging that sucked down every equities market in the world.

The broader markets were of course making year-to-date lows at the same time, and unlike gold stocks, they continued falling after a short intermission. In fact, the Dow fell 2,000 points after Obama was elected. In sharp contrast, the mining stocks went on a tear. Between November ’08 and January ’09, many of our BIG GOLD picks made substantial gains, rising anywhere from 45% to 149%.

This good news isn’t the whole story, of course; many mining stocks saw percentage losses greater than the broader market averages during the Big Selloff. But given the fact that gold stocks started rebounding while the broader markets continued lower, the BIG GOLD portfolio ended the year down 24% while the S&P lost 38%. We were also glad to see our portfolio responded better than the HUI; the broad-based mining index lost 32% on the year. Meanwhile, the demand for physical gold and silver was surging, likely attributed to investors who’d been spooked by the broad meltdown.

We held on to our shares throughout the selloff and advised our readers to do the same – and subsequently watched our stocks rebound mightily. And we fully expect these kinds of surges to repeat as gold pushes higher. Keep in mind that the real mania is yet to come. Once inflation responds to the Federal Reserve’s ongoing monetary foolishness, gold will need a space suit and our miners oxygen masks.

A key point to remember going forward is that gold mining shares constitute a minute fraction of the global equities market, and a small shift in investor interest toward our sector can move gold stocks sharply higher in a big hurry. The market cap of the fifteen largest gold producers in the world -- combined -- is a paltry $125 billion. That’s barely more than a single company such as General Electric, at $116B; much less than Microsoft ($175B); and waaay less than Exxon Mobil at $400B.

Miners have also had a temporary respite from high energy costs due to the collapse in the price of crude oil. Energy is one of the biggest expenses a miner has to carry. As energy prices came down, the cost of producing gold also declined, fattening the bottom line. Oil is likely to get back to and then beyond $143 per barrel at some point, but not for a while. We doubt it will top $75 this year, which is enormously helpful for our companies.

Recently, gold stocks have outperformed bullion, a trend we’re keeping an eye on and one we’re confident will continue in the future, especially when we see the certain emergence of serious inflation and the dollar resumes its downtrend.

So… what to do now?

What we hope you’ve been doing all along. Our general rules: If you’re already fully committed to this sector, stay the course; you will be well rewarded.

For those with money still to invest, accumulate well-run, sound companies on weakness. Volatility will continue; we expect days and weeks marked by retracement in the prices of even the best companies. The dips will be your buying opportunities. Place below-market bids and let the price come to you. Take positions with half or so of the funds you’ve allotted for this sector, then fill out your portfolio with whatever bargains come your way.

Whether you’re already full-up with gold stocks or are just getting started, you should be well positioned before the all-out mania for gold stocks hits.


The Quandary of Timing

It may surprise some to hear that we are not “all-in” yet with our portfolio. Why? Because our attitude is one of caution, and because we know that our big gains since October could get clawed back, partly or wholly, by another reversal – which would lead to another buying opportunity we wouldn’t want to miss.

But caution can be expensive when the market runs away from you. What if the train has already left the station? In that case, those waiting on a pullback will be disappointed. Just as all below-market bids placed on October 28 of last year went unfilled, so could today’s, or tomorrow’s.

Looking as little as a year out, our money is confidently on our stocks going higher – much higher. We expect the government’s assorted “stimulus” packages to fail to deliver as advertised, and usher in high inflation. This will push gold and gold stocks much higher.

But the question is, if the broader markets head lower, will gold stocks follow them down or ride on gold’s coattails?

That question leaves you in a quandary only if you’re looking at the short term. Or if you get emotional about this stuff. Those with no stomach left after the gut-wrenching selloff into last October probably shouldn’t deviate from the cautious strategy outlined above. If you’re one of those who see the big picture and ignore the gyrations along the way – which is what Doug Casey does – then you’re drawn to the idea of placing a bet when you judge that the odds are in your favor. It’s when you see the price of something is far less than its value that you can have the confidence to load up, whether that’s today or perhaps later this summer.

Whether you buy today or wait in hopes of a pullback, we believe you’ll be looking at profits a year from now. In the big picture, our stocks are still deeply undervalued, even after so many of them have doubled off their lows. But could they retreat again? In a general market pullback, definitely. Could they tread water for a while? Certainly. And could they leave present levels in the dust and double again from here? Absolutely.

There are times when one must put away the crystal ball and simply prepare for more than one scenario. This is one of them. Whether you respond more conservatively or more aggressively, keep your eye on the endgame. We think you’ll be glad you did.

Prudent precious metals strategies for conservative investors – that’s what BIG GOLD is all about. And now that the gold price is going up again, you shouldn’t wait to jump on the bandwagon. Read in our latest report why super-low interest rates mean we could see $1,500/oz gold this year – click here to learn more.

A Breakdown of Commodity ETF Options

Brad Zigler, Managing Editor of Hard Assets Investor, recently did a great breakdown of commodity focused ETF options for investors.

This is a question we get quite often - "How can I invest in commodities without opening up a futures account?"  

If you're looking for commodity investment options from the comfort of your stock brokerage account, you'll enjoy Brad's piece.

A Bear Market Rally on 'Roids? This Week in Commodities

How Bout a Little Shot of Inflation With Your Bear Market Rally?

Well we've finally got the bear market rally many of us have been waiting for, kicking into high gear.  I know I don't have to remind you, dear reader, that most of the largest stock market rallies in history occurred during nasty bear markets.  

To illustrate this point, check out this graph of the stock market crash during the Great Depression - and if you've been drinking Bernanke's "green shoots" Kool Aid, you may want to even print it out and tape this to your desk to help detox your system.  No market ever goes straight up or straight down, so this rally was to be expected, perhaps even overdue.

So where are we at now?  Since a low of 666 on the S&P earlier this year, we closed Friday's trading at 929 - a gain of 40% in roughly two months!

Here's the interesting thing - market indicators are now screaming "overbought" - and have been for the past couple of weeks - yet the market's ascent continues, without a pullback...at least yet.  My favorite short-term trader, Jeff Clark, was at least a little early on his call for a market downturn.  So what gives?

One theory I've been noodling on for the past couple of weeks is that inflation may be starting to creep into the system already.  And the first place that will be reflected will be in asset prices - particularly in commodity prices.  Which we're starting to see already.  

On Friday I spoke with our friends at Stansberry Research, and they seem to share similar sentiments.  So the next few weeks will be very interesting to say the least.  

How should you play this?  Yesterday I sold about half of my stocks - I had held them throughout the entire crash, and decided not to look at the portfolio until we got a bear market rally - which we have now.  You may want to do the same.  Don't be too greedy - if you were offered these prices two months ago, would you have hit the "sell" button?

I'm trying to focus all of my investments around a few key themes, such as agricultural commodities, that I can monitor.  I've realized that it only takes 1 good idea to make money investing - so why have a portfolio of 30-40+ different investments that you need to keep track of?  

Big Picture Scenarios

So if we take a step back and look at the big picture - I think we're seeing these two theories as the dominant ones:

1. Green shoots - Things are getting less bad.  We'll have a long, slow recovery.  In the end, things will be OK.  Good time to buy stocks, they are still undervalued.  This seems to be the theory supported by the mainstream financial press and Bernanke.  So that's enough for us to throw it out.


2. Inflation soon - Governments are printing money at an alarming rate.  This will eventually result inflation once the money works its way into the system.  Most of the smart investment minds I track seem to believe this.

My only problem with #2 is that it's too obvious.  It is the universal contrarian viewpoint, and almost seems to be too widely shared.  Just like how the dollar should have gone down last year, and interest rates should have risen...and what happened in reality?  The exact opposite.

So if we try to "expect the unexpected" - what could happen now that few people are expecting?

1. Outright deflation that can't be stopped - a la Robert Prechter.  He believes the DOW will eventually reach it's low below 1000 - now THAT'S a contrarian viewpoint!  


2. Inflation right now - the horse is out of the barn, interest rates have bottomed and are on their way to the moon, commodity prices are already starting to move, and we're going to reach the "uh oh" inflation phase much sooner than expected.

Regular readers know that I'm starting to warm up to the possibility of #2, and will trade accordingly as long as the commodity charts continue to agree.  I'm keeping an open mind to all of these scenarios, and will do my best to let the markets guide my actions, rather than being wed to and stubbornly trading on a preferred theory, which is usually a quick way to financial ruin!

In Case You Missed It...Top Commodity and Economic News...

• Demand for US Treasuries Poor in Latest Auction
• A Long Overdue Sugar High
• Marc Faber: We've Begun a 15-20 Year Bear Market in Bonds
• Australian Dollar Still Kicking Ass
• Why Paulson and/or Bernanke Could Do Jail Time

You Can't Kiss All the Girls...Other Notable Potential Trades and Performances

• Natural Gas - Strong rally off it's lows - great call by Jeff Clark!
• Treasuries - Long term interest rates have broken out...are they on a one way track to the moon?
• Cotton - Continues it's steady climb, supported by strong fundamentals.

Positions Update - Feels Like Old Times!

What a week!  And the recent weekly winning streak rolls on...in a big way...

Now that I've got my confidence back a little bit, I'm probably quite dangerous to myself at the moment!

It must have been something in the air, or the tequila, on Cinco de Mayo, as I decided to grow some onions and do a little pyramid action.  Sugar continued to look strong, and I figured if it's heading higher, I'd rather have two contracts than one.

The big trade came later that night - after much deliberation and a couple of beers, I decided that I owed it to myself to buy the breakout in the Australian dollar.  I have to admit, I didn't sleep well that night after making the trade - I was concerned that we'd see a pullback in the Aussie driven by a pullback in the equity markets.  And being fairly overleveraged at this point, a loss on this trade was not really something I could handle.

By the way - I don't condone this use of leverage.  If I had practiced proper risk management, maybe I wouldn't have pissed my account down from it's heights last spring.  Do as I say, not as I do.  Of course you're reading this blog for entertainment purposes only...and these trades are all hypothetical...so I'm glad we have a mutual understanding.

Anyway back to the story - the Aussie did drop about half a cent, then rallied STRONG to end the week!  So it's a happy ending for now.

What could possibly go wrong from here?  For what it's worth, sugar was down on Friday, with most of the markets up.  Hopefully just a technical correction.  The real risk to each position below is a correction downward in the equity markets.  This is certainly overdue...so we'll watch and see.  It's also possible, as discussed, that we're getting a little swig of inflation right now, and this "bear market rally" could have more legs than many have anticipated.

Open positions

Date	Position	Qty	Month/Yr	Contract	Strike	Call/Put	Entry	Last	Profit/Loss	Mkt
05/05/09	Long	1	JUN 09	Australian Dlr			0.7385	0.7666	$2,810.00
04/08/09	Long	1	JUL 09	Orange Juice			81.95	90.70	$1,312.50
04/20/09	Long	1	JUL 09	Sugar #11			13.38	15.30	$2,150.40
05/05/09	Long	1	JUL 09	Sugar #11			15.16	15.30	$156.80
Net Profit/Loss On Open Positions									$6,429.70

Current Account Value: $31,135.73

Cashed out: $20,000.00
Total value: $51,135.73
Weekly return: 15.7% (!)
2009 YTD return: -38.7% (Don't call it a comeback!?)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Anyone See $1 Trillon? The Fed's Looking for It

This video's a doozy - Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations.

Further reading:

• Demand for US Treasuries Poor in Latest Auction
• How Bad Will the Financial Crisis Get?
• Why Gold Will Soar Past $2,000

Demand for US Treasuries Poor in Latest Auction

Yesterday, yields on 30-year US Treasuries skyrocketed on poor demand in the latest bond auction.  Yields jumped from 4.1% to 4.3%.

Tough to imagine why demand would have been so lackluster - maybe it's the fact that the US government will never be able to pay any of this debt back?  That is, without printing it?

Last month Marc Faber told Bloomberg that bond yields bottomed for good on December 18, 2008 - and he now expects them to rise for the next 15-20 years.

So is this breakout finally the cue to short long-term US Treasuries?  In the short term, I could see rates heading lower once again, if one of the following two things happen:

• The Fed steps up their purchases of long term debt.  In the long run this is highly inflationary and won't work, but in the short term they could drive rates down.
• And end to this bear market rally could once again trigger the "flight to safety" trades - which previously buoyed US debt and the dollar, at the expense of everything else.

Long term this appears to be a no-brainer, as interest rates should head to the moon.  It's just the apparent obviousness of the whole thing that gives me hesitation from putting this trade on right now.  I am considering picking up some TBT for my Scottrade account, and just doing a "buy and hold" on it.

Shout out to our buddy Brian Hunt at The Daily Crux for his coverage of this story.

Further reading: Doug Casey says Treasuries are the next bubble to burst.

A Long Overdue Sugar High

This morning, I authored a guest piece for the folks at Commodity News Center, breaking down the recent sugar rally.  Regular readers will be quite familiar with the fundamental factors discussed.  I always try to constantly re-examine my assumptions to make sure I'm not falling in love with a trade - if you've got a sugar position, or are thinking about initiating one, you may want to review the article - and let me know what you think!  I always appreciate and learn from outside perspective.

A Long Overdue Sugar High

Sugar futures are soaring – to their highest levels since 2006 - buoyed by strong supply/demand fundamentals, along with freshly printed US dollars. How long can this rally continue? Let’s review the driving factors. 

Contents:

• Supply/Demand Fundamentals
• Money Printing
• What Could Go Wrong
• Outlook for Sugar

Read this piece at Commodity News Center...

Marc Faber: We've Begun a 15-20 Year Bear Market in Bonds

Here's Dr. Doom himself, Marc Faber, giving one of his usual insightful and thought provoking interviews for Bloomberg.

What really caught my ear was around the 4:30 mark, he proclaimed the bull market in long dated bonds to have ended as of December 18, 2008.  (He also pinpoints the start of the bull market at September 21, 1981).  Faber believes we're now in the beginning of a long term bear market for these bonds, which he expects to last 15-20 years.

This really is a fantastic interview - be sure to check out Faber's answer to how Geithner and company can locate the bad apples in the financial system...I'll save the punch line for you.  It's around the 7:20 mark.

Other quick notes:

• Gold "could" dip back down to $750-800 (before heading higher)
• He likes the Canadian, Australian, and Singapore dollars better than the US dollar

Here's the full interview:

More recent coverage of Faber:

• Peter Schiff Interviews Marc Faber
• Faber Says This Rally May Have Some More Legs

Ed. note: If you love Faber, you'll also get a real kick out of Doug Casey.  Check out his piece about how we're in the early innings of the Greater Depression.

Australian Dollar Still Kicking Ass

Monday night, we were fortunate enough to initiate a long position in the Australian dollar.  I took a long, hard look at it before entering the position - on one hand, it had already been rallying strong and was afraid may be due for a pullback.  But the fundamentals and technicals looked too good, so I closed my eyes and hit the Buy button.

And now am glad I did, as the Aussie earlier rallied above the 75-cent mark!  Here's the good word on the latest pop from my favorite currency analyst, Everbank's Chuck Butler:

But the Big Winner of yesterday and last night is the Aussie dollar (A$)... It's on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The A$ got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in 8 months! The A$ is 75-cents and change this morning, heading to 76-cents... A 7-month high! 

Why Paulson and/or Bernanke Could Do Jail Time

Hank Paulson and Ben Bernanke are sweating right now.  The Bank of America scandal could have some legs, especially with a Democratic Congress looking for folks to tar and feather.  In fact, one of them could be toast - whoever doesn't rat first.  Read on for more details in this guest piece by Olivier Garret, CEO of Casey Research.

Bigger Than Watergate?
By Olivier Garret, CEO, Casey Research

Reportedly, Bill O’Reilly referred to a recent story out of our nation’s capital as “bigger than Watergate.”

Whether the story is bigger than Watergate or not, it is definitely a scandal of huge proportions.

To sum it up, on April 23, 2009, New York Attorney General Andrew Cuomo sent a letter to Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs Chris Dodd; Chairman of the House Financial Services Committee Barney Frank; SEC Chairwoman Mary Schapiro; and Chairwoman of the Congressional Oversight Panel Elizabeth Warren.

The letter outlined how former Treasury Secretary Paulson and Fed Chairman Ben Bernanke forced Bank of America’s acquisition of Merrill Lynch – even though Bank of America CEO Ken Lewis and the board of directors tried to pull the plug on the deal after it turned out that Merrill Lynch was far deeper in debt than it had admitted.

In the words of Attorney General Cuomo himself:

Immediately after learning on December 14, 2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (“MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17, 2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

Bank of America’s attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.

Meanwhile Ken Lewis has been sacked as chairman of the board at Bank of America… even though he might well have been the only conscientious and honest player in this scheme. And now the sharks have started to turn on each other: according to Cuomo, Paulson “largely corroborated Lewis’s account” and informed the attorney general’s office that he “made the threat at the request of Chairman Bernanke.” The latter has so far chosen to keep his mouth shut.

The key factor here is not that the Devious Duo forced Bank of America into a merger it didn’t want to commit to. Granted, that’s an unheard-of interference of government in the free market, but we’re quite sure that the Powers-That-Be could sweep it under the rug by invoking the “greater good.”

No, the part of the story that could really break Al Paulson and Don Bernanke’s necks is the failure to inform the Securities and Exchange Commission, as well as Bank of America’s shareholders, of the extent of toxic waste Bank of America was forced to accept. That’s fraud, pure and simple.

And that’s a pretty good sign that this is not going to go away. Some of the Casey Research editors – yes, we do have bets out – think it’s going to be huge, especially since the scandal happened on President Bush’s watch and the Democrats are in control of Congress. Chances are that either Paulson or Bernanke is going down, depending who cuts a deal with prosecutors first. Their “friends in high places” may be able to keep the Justice Department out of it, but they won’t be able to control ambitious state officials like Cuomo. There’s blood in the water, and this is a career maker for a prosecutor.

So what happens when the highest financial officials in the U.S. government are unmasked as crooks? Will there be riots in the streets? Will the average American pick up his torch and pitchfork and march on Washington D.C.? Probably not. But it may happen at some point as we are moving deeper into the Greater Depression, a term coined by Doug Casey, our resident contrarian investment guru. Read Doug’s FREE, 13-page special report about what will happen when social unrest breaks out in the United States, and what you should do to prepare your assets for that time. Click here to read it now.

Over 20% (!) of US Homeowners are Underwater on Their Homes

The Wall St Journal reports that over 20% of US homeowners owe more on their mortgage than their homes are worth.

Some metropolitan areas are faring worse – much worse – than others. Las Vegas takes the prize, with an astounding 67.2% of homes that are “upside down” in terms of equity. Maybe the Obama administration can order the remaining 32.8% can take what’s left of their home equity over to the roulette wheel at MGM – appealing to their patriotic duty to help less fortunate home and casino owners with each spin of the wheel.

If you’re scoring at home, perennial foreclosure powerhouse Stockton, CA placed a distance 2nd, with 51% of their homes underwater.

This bit was also picked up by our friends at The Daily Crux.

How bad can this financial crisis get?  Check out Bud Conrad's analysis of our current situation, in comparison with similar types of financial collapses.

Australian Dollar Hits 6-Month High...Can It's Rally Continue?

The Australian dollar topped the 74-cents mark today to hit a new 6-month high against the US dollar.

The Aussie has been rallying strong of late, and this recent strength is now also underpinned by yesterday's decision by the RBA (Reserve Bank of Australia) to hold interest rates at 3% for at least the near term.  The positive rate differential for the Aussie compared with the US Dollar and Japanese Yen should be a bullish fundamental factor going forward.

Also in Australia's favor is the renewed strength in the Chinese economy, and commodity prices at large.  A continuation of these trends should help the Aussie's rally continue, since the Austrailian economy is largely commodity driven.

We can also credit some of the recent strength to the rally in world equity markets.  With markets rallying, risk aversion appears to be creeping back into play, as investors and traders are once again loading up on high yielding currencies.

Finally it's important to note that Australia is one of the lone major economies not to yet engage in quantitative easing - also known as "money printing."  The US, UK, Japan, and Switzerland have all turned to QE.  As strange as this may sound, a steady supply of money is usually bullish for a currency, especially when priced against others that are being printed at full speed and dropped from helicopters.

Potential roadblocks for the Australian dollar?  A downturn in the markets - which is a real risk, given this is likely a bear market rally - could once again dampen investors' risk appetite and prompt them to sell the "higher risk" currencies and flea back to that beacon of safety and fiscal responsibility, the US dollar. 

All in all, I weighed the risk/reward factors last night, and decided to go long 1 Australian dollar contract.  I am long-term bullish on the currency, and the recent breakout was enough of a technical indicator for me to take the leap.

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How can you too invest in the Australian dollar...without trading futures?

• Buy the ETF FXA, which tracks it's price
• Open up a CD with EverBank denominated in Australian dollars

For further reading... here's our most popular article of the day: How Bad Will The Financial Crisis Get?

Why Agriculture Prices Have Held Up Remarkably Well

A recent piece in The Economist highlighted the recent strength of agriculture prices in the face of the downturn, and the reason for it.

Though prices of the meats, grains, and softs are still off their 2008 highs - they're not off by much anymore - as commodities such as cotton, soybeans, and sugar are starting to rally in a big way. 

How could this be?  Aren't we in a Depression?  Perhaps, but supply has come offline in a big way, while demand has remained strong.  As the Economist piece points out: "No matter how bad things get, people still need to eat."

It's looking like, though there were many bubbles in 2008, China's food consumption was not one of them.  Back to the article, with some staggering numbers:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

And remember, many food stock levels are at historic lows.  Unless new supply comes online soon - and I don't know where that supply is going to come from - we could be in for a whale of a rally in food.

Read the full article in The Economist...

Further reading about investment opportunities in agriculture:

• Soft Commodities are Starting to Scream: "Inflation!"
• Sugar Futures Rally, OJ Takes a Breather
• Time to Invest in Orange Juice?

Jim Rogers: IMF Sales May Drive Gold Below $700

Jim Rogers says that IMF sales of gold could drive the price of the barbarous relic below $700/ounce.

Rogers told Bloomberg: ”The fact is that IMF is trying to get permission from everybody to sell gold. I don’t know it will succeed or not. But if and when IMF sells its gold, gold prices may go to a bottom. Who knows? It may go down to US$700. IMF has got a lot of gold to sell. If it does, I hope I’m brave enough and smart enough to buy more."

He added that he does not intend to sell any gold at this time.

More recent Jim Rogers coverage:

• Jim Rogers Interviewed by GoldSeek Radio
• Jim Rogers Interviewed in BusinessWeek
• Rogers Prefers Oil Over Gold Right Now

Editor's note: I also guest posted this piece over at The Daily Crux.

Soft Commodities are Starting to Scream: "Inflation!"

Milton Friedman said that inflation is "always and everywhere a monetary phenomenon."  Judging by the recent price action in many of the soft and agricultural commodities, they appear to agree.

Ben Bernanke, a student of the Great Depression, is making a bet the Friedman was wrong.  Bernanke believes that because Friedman did much of his work during a period of time when the velocity of money was relatively constant, he did not properly account for this factor in determining inflation.

Helicopter Ben is conducting this "Great Experiment" of money printing to stave off a Depression based on the monetary theory developed by economist Irving Fisher, who believed the Depression occurred because money velocity dropped off a cliff, and there was no increase in money supply to counter this.  Thus the US slipped into a deflationary spiral.

This is the big question - when the velocity of money drops, as it is today, should the money supply be increased?  Who's right - Fisher or Friedman?

We don't yet know - though, as always, the market will decide the winners and losers.  And lately it's hard not to notice what the commodity markets have been telling us, especially agriculture.

First, let's see Exhibit A - the adjusted monetary base of the US, which still appears to be in a "bull market":

Many of us saw the initial spike and immediately yelled "Inflation!"  We loaded up and gold and ran for the hills.  And what happened?  The spike in monetary growth continued to grow to the sky, and gold got slammed - along with almost every other asset class.  (Save the US Dollar and US Treasuries - hats off if you had that trade, as you are a true "contrarian's contrarian"!)

Fast forward to a few weeks ago, and we noticed that not only had commodities appeared to have formed a bottom, but they were starting to climb.

This week, we saw a full fledged break out in the softs and the grains - let's quickly have a look at three of our current favorites.

Sugar futures - our old favorite - rallied over 5% this week, to close a shade under 15-cents.  Sugar's been on a steady climb - fundamentals look quite appealing, as we discussed last week, and there's no arguing with this chart:

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View the full YO/K9-NM chart at Wikinvest

Cotton futures continued their strong rally, breaking right past the low 50's resistance we were keeping an eye on:

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Finally take a look at Soybeans!  This rally was kicked off when soybean acreage came in below expectations, and it's been off to the races ever since:

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So which will it be, inflation or deflation?  Don't get too hung up in economic theory - remember that the markets are always right.  And right now, these markets, buoyed as well by strong fundamentals, appear to be casting an emphatic vote for inflation!

 

Top Commodity and Economic News...

• Why gold is going much higher than $2,000
• Jim Rogers interviewed by GoldSeek Radio
• The US is now "swimming" in Natural Gas
• Atlas Shrugged sales are soaring!

Current Futures Positions

Nothing new...unfortunately!  I thought about adding to the sugar position on Thursday - and I should have!  Will seriously look at adding another contract tomorrow or Tuesday on continued strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09  Long  1 JUL 09 Orange Juice 81.95 85.10 $472.50

04/20/09  Long  1 JUL 09  Sugar #11     13.79  14.91$1,713.60

Net Profit/Loss On Open Positions $2,186.10

Current Account Value: $26,920.49

Cashed out: $20,000.00
Total value: $46,920.49
Weekly return: 3.5%
2009 YTD return: -47.0% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Editor's Note: This article was also published by SeekingAlpha.com.

Oil Service Stocks are Breaking Out

Brian Hunt, Editor in Chief at Stansberry Research, writes that oil service stocks are breaking out to 6-month highs, according to the chart of OIH, the ETF of major oil service companies.

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Brian writes: "If oil continues the slow and steady rebound it's been enjoying since February, the oil services could run much higher. Just don't forget your trailing stops once the rest of the crowd figures out."

An interesting trading play on oil that you may want to keep your eye on.  Brian is a very astute trader/investor - I had the good fortune to recently connect with him, and since I've started penning some guest pieces for Stansberry Research's new website The Daily Crux.

Paul Van Eeden: Banks Aren't Lending Because They're Still Broke

Why are the banks still not lending, even though they are supposed to be flush with cash?  

Because they don't actually have the cash, says Paul Van Eeden in an excellent interview with BNN.

It's an interesting perspective - Van Eeden believes that the cash that banks to have is parked with the Fed with strings attached.  So it's not really theirs to lend.  And there is a great crisis of confidence in lending - folks who are looking for loans aren't desirable borrowers for banks, and folks who would be creditworthy are not out there looking for loans.

The interview is also worth watching because Van Eeden gives an excellent, clear explanation of how the government is mucking up any potential recovery with it's policies.  His recommendation - let the market sort it out.  How novel!

What is the Fed's "Stimulus Ratio"?

It's the magnitude of Fed manipulation with the money supply...so would it shock you to learn the stimulus ratio has been clocking historic highs over the past 12 months?

I'd recommend you check out this insightful article written by Paul Kluskowski, where he defines the stimulus ratio as the ratio of long-term rates to short-term rates.  According to Paul, the manipulation of this ratio, which basically composes the yield curve, is the means by which the Fed manipulates the monetary supply.

And it makes sense - the Fed has total control over short-term rates, but very little control over long-term rates.  And any control they can exert over long-term rates...such as, say, printing money to buy long-term US Treasuries to keep those rates low...can only go on for a limited amount of time.  Or so we believe.

Because banks borrow short and lend long, it's really easy for them to make money when short term rates are in the basement - as they are today.  Doesn't require a lot of brain cells when the deck is stacked in your favor like that.

Here's where it gets interesting - Paul says the stimulus ratio mostly fluctuated between 0.9 and 2.5 throughout most of the 20th century.  Anytime the ratio topped 1.15, it was fairly certain there would be a rally in the stock market.

Recently, this ratio peaked at 98 in November 2008!  And at the time of Paul's writing, the ratio still stands at 13!

Point being, we are clearly in uncharted waters economically, and all bets are off. 

Read the full article by Paul Kluskowski here...

Further recommended reading:

• Uncharted Waters - A detailed look at the unprecedented economic actions our government has taken
• Global Economics on Tilt - How to Protect Your Ass(ets)

Why Gold Is Going Much Higher Than $2,000

According to Wikipedia, the Tilt is a state of mental confusion in which a poker player adopts a less than optimal strategy, usually resulting in the player becoming over-agreesive.  In this guest piece, Jeff Clark, one of our favorite analysts, explores how global economics are now "on Tilt", driven, with wreckless decision after wreckless decision being handed down by our fearless government bureaucrats.  

What does this mean for gold?  Read on and find out!

***

Global Economics on Tilt – How to Protect Your Ass(ets)
By Jeff Clark, Editor, BIG GOLD


Gold isn’t going to $2,000 an ounce.

Before you gag on your coffee or suffer chest pains, allow me to explain.

We’re about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.

However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.

I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.

Gold’s Percentage Rise in the Last Bull Market. What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce

Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country's deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.

Witness the Breakdown

When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.

• Eastern Europe borders on bankruptcy. Brazil's economy is falling off a cliff. Ditto Mexico.

• Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France. 

• In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now...) 

• An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac's new CEO resigned after six months on the job. 

• Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed. 

• The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.

• The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion. 

• High unemployment has become a worldwide epidemic, with the infection spreading. 

• With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in. 
  

Both Hands on the Wheel

Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended BIG GOLD strategy remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.

As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.

***

Even though some of the mainstream media are already popping the champagne, cheerfully pronouncing the end of the crisis, we beg to differ. The economic quagmire the U.S. and much of the developed world is in is far from over… so be right and sit tight, as we at Casey Research like to say. And find out how you can make the most out of gold as a safe-haven investment, by clicking here.



More recent articles by Jeff Clark:

• Natural gas is Ready to Rally
• Why eBay is the Best Indicator of Gold's Fair Value

Daily Show Spoof Investigates Socialism

The Daily Show sent correspondent Wyatt Cenac to Sweeden to "invesigate" the effects of socialsm in person.  Hilarious bit - perfect for a Friday. 

The Daily Show With Jon Stewart	M - Th 11p / 10c
The Stockholm Syndrome
thedailyshow.com
Daily Show Full Episodes Economic Crisis First 100 Days

The Daily Show With Jon Stewart	M - Th 11p / 10c
The Stockholm Syndrome Pt. 2
thedailyshow.com
Daily Show Full Episodes Economic Crisis First 100 Days

Related articles about socialism:

• Ayn Rand, Atlas Shrugged Book Sales Skyrocket
• A Socialist Plea From My Local Utility Company
• Greater Depression Investment Trends - And How To Play Them

Today is No Pants Day!

Did you know that May 1 is official No Pants Day around the world?  

What in the world is No Pants Day?

No Pants Day is a day where everyone, be they students, respectable businessmen, or cherished community leaders, leave their pants behind. Usually this means wearing thick, appropriately modest boxer shorts, but bloomers, slips, briefs, and boxer-briefs all work as well.

Check out the official No Pants Day website for more details about this occassion, and learn how you can participate.